Nonlinear growth effect of remittances in recipient countries: an econometric analysis of remittances-growth nexus in Bangladesh

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Oct 28, 2013 (3 years and 10 months ago)

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Nonlinear growth effect of remittances in recipient countries: an
econometric analysis of remittances
-
growth nexus in Bangladesh


Gazi Mainul Hassan

University of Western Sydney

E
-
mail:
gazi.hassan@uws.edu.au


Shamim Shakur

School of Economics and Finance, Massey University

Palmerston North, New Zealand

E
-
mail
s.shakur@massey.ac.nz


Mohammed Bhuyan

Department of Accounting and Corporate Governance

Macquarie Universit
y, North Ryde

NSW, Australia



Abstract
:

The macroeconomic impacts of remittances flows on developing economies are not well
understood. The paper is an attempt to understand the impact of inward remittances flows on
per capita GDP growth in Bangladesh during 1974
-
2006. We find that
the growth ef
fect of
remittances is negative at first but becomes positive at a later stage
-

a strong evidence of a non
-
linear relationship.
This could be due to unproductive use of remittances in the beginning
followed by more productive utilisation. Remittances posit
ively affect per capita GDP growth in
Bangladesh when the complementarity between remittances and financial development is
incorporated into the analysis.




1

1. Introduction



The importance of the flow
of
workers’ remittances in the economies of developing
countries
during

the last few decades or so cannot be ignored at the face changing global
order where most of the economies in the world are transforming themselves to the call
of globalization

and

transm
uting t
owards more open markets with free
r

flow
s

of goods
and factors across borders. Remittances



the unrequited transfer of funds by the migrants
to their families at home


are a source of foreign exchange which is much scarce in
developing economies
.
It is a more stable
and less volatile
sourc
e of external finance
when compared to the other forms of flows which include

offic
ial development assistance

and

foreign direct investment (Ratha 2007)
.
Given the surge in the flows of remittances
world wide (IMF

2005, W
orld Bank 2005, and Ratha 2007), especially in the developing
countries where remittances are twice the size of official development assistance (ODA)
and as large as foreign direct investment (FDI), it has become important to
s
tudy

the
developme
nt impacts of remittances in those
economies
.
Potentially r
emittances

in
flow
s

can have strong
development
impacts in the economy. As Kapur (2004) notes:


“Remittances finance consumption, land and housing purchases and philanthropy;
they are an important s
ource of social insurance in lower income countries; and
they provide liquidity for small enterprises (in the absence of well functioning
credit markets) as well as capital investments


in equipment, land, wells and
irrigation works and education


with l
onger
-
term implications for economic
development.”



However,

remittances can
also
have
counter effects

in the source economy unlike ODA
or FDI because it is an outcome of
labour migration
. Like there are externalities (positive
and/or negative) associated

with labour migration, the impact of remittances on the
economy measured at the macroeconomic, household or community level can be
either
positive or negative in
the country of origin. Table 1
compiles the major conclusions
reached in the researches that
fall

under the heading of “development impact of
remittances”.


2

Table. 1

Possible Positive and Negative Impacts of R
emittances




Positive Impact of Remittances

Negative Impact

Macroeconomic
level



Strengthening balance of
payments by provision of
foreign

exchange



Remittances are stable
and counter
-
cyclical




Deterioration of
balance of trade by
stimulation of import
and appreciation of
local currency



Deterioration of ‘social
balance’



Remittances tend to
decrease as migrant
community is more
established in
the
destination country



Economic dependency
of remittances

Household level



Allow family to meet
basic needs



Opening up of
opportunities for
investing in children’s
e摵cati潮Ⱐ health care
etcK



Loosening of constraints
in family budget to invest
in business

or savings



Emergency resources



Social security resource
base



Dependence on
remittances and
neglect of local
productive activities by
families



Hardly used for
productive investment

Community and
regional level



Boost local economy



Financing local
development projects



Increase inequality
between families who
receive remittances
and those who do not



Inflation


Source
: De Bruyn, T. and Wets, J. (2006)


The topic
of
“development impact of remittances” is a broad and complex
one
and the
analysis is les
s straight forward. During the last decade

or so there has been a surge in
research
es

on remittances and
consequently
there has emerged a vast literature around the



3

topic of “development impact remittances”.
This paper h
owever
is directed towards
studying

only

the growth impact
s

of remittances in Bangladesh

where “remittance and
economic growth” is a topic

in

the “macroeconomic impact of remittances”


a sub
-
section of “
development impact of remittances


literature
.
1



This
paper

is organized as fo
llows. Following this
brief introduction
the

paper will
discuss in section two the dynamics of remittances
flows
and other important macro
economic variables in Bangladesh. Section three
will provide

a review of researches on
remittances in Bangladesh foll
owed by section four which
reviews

the literature on
remittances and economic growth
. In section

five
the paper
will present an econometric
model and provide

econometric results on
the

impact of

remittances on economic growth
in Bangladesh
during 1974


20
06
and
conclude by

outlining the
main

findings and
limitations

of the study

and
providing guidance

for further

research.




1

The development impact of remittances literature include (along with macro topics) those topics that
study its effect on household poverty and inequality, househo
ld’s labor supply, schooling of children, child
labor, child health and other household behaviors (e.g. savings, and expenditures). These topics use
household level survey data for analysis in contrast to the “macroeconomic impact of remittances” studies
w
hich use aggregate macroeconomic data.


4

2.
Remittances Flows in Bangladesh


Bangladesh has experienced continuous surge in inward remittances flows both in terms
of volume as

well as in terms of ratio to GDP over the last thirty years. According to
Bangladesh Bank’s Quarterly
2

total inward remittances was USD 24 million in 1976,
but

the

amount stood at a staggering USD 6584 million (just over 6.5 billion) in 2007.
According to IMF’s International Financial Statistics, October 2007, Bangladesh was the
tenth largest remittances recipient economy among the developing countries measured by
t
he average for the flows over the period 1990


2005. It was on the top
ten
recipient
s

of
remittances list
in 2006
by Ratha (2007) based on volume and ranked 14
th
in 2005 (World
Bank, Global Economic Prospect 2006). The remittances to GDP ratio
reached

to
an
impressive 9.4 percent in 2007 from
a decent
3.5
percent
in 1997
.


Figure 1. External Flows in Bangladesh


.
In Figure 1

we can see that c
ompared to other forms of external finance
s

viz overseas
development assistance (ODA) and foreign direct investment

(FDI)
, remittances flows in
Bangladesh was
more stable,
less
volatile

and constantly rising. After 1996 the sizes of
remittances have exceeded other flows. In the wake of falling ODA,

remittances remain
as the most important source of external finance.




2

www.bangladesh
-
bank.org


5

The nature and size of remittances inflow
s warrant

a systematic study of their
macroeconomic impact
s

into the economy. According to Chami et al. (2008) there are
three main features of

remittances that provide impetus to stu
dy their macroeconomic
impacts. These are: i) s
ize of these flows relative to the size of the recipient economies;

ii) t
he likelihood that these flows will continue unabated because of
continued trend in
g
lobalizatio
n;

and iii)
These flows are quite distinct from those of official aid or private
capital. (In contrast to these remittances are composed of numerous small transfers
between private individuals which are tied to familial relationship in the home country)
.


Given the importance
of
studying the macroeconomic impact of remittances as outlined
above,
in my Ph.D. thesis,
we
endeavour

to concentrate our study into four areas of the
macroeconomy
in Bangladesh
where remittances can have potential impacts
. These are
the impact of
remittances
on

macroeconomic volatility, financial development, real
exchange rate
s

and
on
economic growth.
Our hypotheses are in Bangladesh remittances
reduce macroeconomic volatility, promote financial development, and apprecia
te real
exchange rate an
d through these channels affect

economic growth.
However, in this paper
we will just concentrate on the impact of remittances on GDP growth in Bangladesh.


The macroeconomic effects of remittances in the economy can be decomposed in
to their
effects on savings, investment, consumption and growth. As a basic macroeconomic
identity we know that total disposable income equals consumption plus savings.
Remittances can be thought of augmenting total disposable income
s

of
the
households. A
part of which is consumed and rest is saved. In the portion of consumption expenditures
some are actually investments as represented by expenditure incurred to buy durable
household goods, finance education and health, purchase land or to provide capital f
or
micro business start ups etc. So the impact of remittances on the receiving economy
should be working through savings and investment as well as short run effects on
aggregate demand and output through consumption.
Some important graphs related to
remitt
ances and other

macroeconomic variables
in Bangladesh like investment, savings,
consumption, financial deepening, and growth are
provided
through Figures 2 to 8
.



6

Figure 2. Remittances and Fixed Investment


Figure 2 shows that r
emittances to GDP ratio an
d gross fixed investment to GDP ratio in
Bangladesh

seem

to be positively connected over the period over the period 1990


2006.
Remittances can also go towards financing household consumption

as we can see in
Figure3.



Figure 3. Remittances and Consumpti
on Expenditure



7

Figure 3
shows how remittances to GDP and household consumption expenditures to
GDP behaved during the period 1990


2006.
Household final consumption expenditures
to GDP ratio have fallen over the period 1990


2006 in Bangladesh while re
mittances to
GDP ratio have surged. These two series may be negatively related. This may imply
that
at

the

macroeconomic level remittances flow
s

did not contribute
to
increased
consumption in Bangladesh. This lead
s

to the speculation that remittances inflo
ws
may
have
contributed to the pool of national savings

instead
.


Figure 4. Remittances and National Savings


The total savings effect of remittances
is
the sum of foreign savings and domestic
savings. Remittances are component of foreign savings and

should be augmenting
national savings which is
a sum
of domestic
and

foreign savings

by increasing the total
pool of resources for investment. According to Figure 4
there seems to be a strong
indication that in Bangladesh the two ratios
-
gross savings/GDP
and remittances/GDP
-

are positively correlated. Especially during 2001 to 2006 when remittance to GDP ratio
rose from around 4 percent to just above 8 percent, saving to GDP ratio increased from
around 25 percent to just above 30 percent.



8

Remittances can

lead to increase in the demand for money and expand the supply of
funds into the recipient countries’ banking system
. This

could be

affecting the broad
measures of financial development


credit to private sector to GDP and M2 to GDP


in
Bangladesh.



F
igure 5. Remittances and Financial Development


We can see from Figure 5
, there seems to be a strong link between remittances to GDP
ratios and the measures of financial deepening (M2/GDP and Domestic Credit/GDP) in
Bangladesh. The graph shows a positive
correlation between remittances and other two
series leading to the conjecture that remittances inflow could
contribute

to
the
development of the financial sector in the Bangladesh economy.


In
Figure 6
we will casually observe the dynamics of real effecti
ve exchange rate in
Bangladesh. Inflow
s

of remittances can cause real appreciation of the real
effective
exchange rate
(REER)
and make the external sector uncompetitive giving rise to the
phenomenon called “Dutch disease”. Based
on
Bangladesh Bank’s Quart
erly the
dynamics of real exchange in Bangladesh

over the two year

period
s

2005 and 2007 was
rather

stable on average.


9






Figure 6.
Exchange Rate Movements, March 2005
-

June 2007







Source: Bangladesh Bank Quarterly, June 2007


Based on
Figure 6,
for

this time period

March 2005 to June 2007
, there is no apparent
trend of increase in the REER index or real appreciation of exchange rate in Bangladesh.

There is some indication of REER appreciation during March 2005 to December 2005
followed by depreciati
on until March 2006. Then come the period of stable REER only
except July to September 2007

which had been charecterised by a slight appreciation.
The overall trend is that REER is at the same level at the end of period
compared to
where it was in the begi
nning of the period. I
f we take a look at the data of REER for a
bit longer time period, we can see
instead
that
there
is
some
sign of
real

depreciation
compared to other South Asian economies.
Figure 7
shows that over the
longer time
period
of
1998/99 to
2005/06, there is
also
no sign of overvaluation of real exchange rate
and erosion in the competitiveness of the tradable sector

in Bangladesh
. In fact, compared
with its
neighbouring

countries, Bangladesh‘s real exchange rate has depreciated over the
perio
d 1998


2006 and has become increasingly more competitive over time. We can
say that, over the period 1998


2007, during when remittances continued to surge in
Bangladesh, the REER
was depreciating most of the time or has
remained

stable, but it
had not
been rising to erode the competitiveness of the tradable sector.



10

Figure 7.
REER in Bangladesh, India, Pakistan and Sri
-
Lanka




Source: Quibria (2008)


So far we have seen how remittances correlate with investment, consumption, savings,
and real exchange

rate in Bangladesh. Finally we want to see how remittances correlate
with economic growth.


Figure 8. Remittances and Economic Growth



11

It is dif
ficult to say by looking at Figure 8
if there is any link between remittance and
GDP growth in Bangladesh
. However,
though GDP growth per se is stochastic,
trend
in

GDP growth in
the
graph is increasing over the period 1990 to 2006 during
the time when
remittances to GDP ratio are

also steadily increasing.
So there might be a relationship.
One can see another

i
nteresting observation in Figure 8
. During the time when remittance
was increasing steadily, especially from 1992 to 2001, the variability of GDP growth rate,
measured as the deviation of GDP growth from the trend, was also
considerably less
.
This could
mean that increase
d

flow
s

of remittances can reduce output volatility.




12

3
.
Review of
Studies on
Remittances
i
n Bangladesh


Researches related to remittances in Bangladesh are scant and have not yet been direc
ted
in the area where
this thesi
s aims

to cont
ribute which
is
the macroeconomic impact of
remittances. The remittances literature related to Bangladesh tends to be both qualitative
and quantitative in nature.
Some

earlier studies employ quantitative methods to analyse
the empirical issues related to remitta
nces. The

later studies are primarily qualitative
aimed towards understanding the nature
and profiles
of remitter and recipient household
s

in a broader social co
ntext.


Remittances and Savings





The earliest
paper

on remittances in Bangladesh
is a
micro level

study

by Mahmud and
Osmani (1980) who quantitatively modelled expenditure and saving behaviour of the
migrant and the household receiving remittances. They

found that migrants remit more
than eighty percent of their income from abroad, and
that
there is a significant difference
in the saving rate between remittance receiving and non
-
receiving household. They also
showed that savings ratio monotonically incre
ases with income and for the highest
remittance receiving income group saving ratio was found to be almost three fourth of
income. One central finding of their study is that remittances go into unproductive use.

An early quantitative study at the macroeco
nomic level of remittances in Bangladesh in
comparison to other Asian countries
is
by Qubria (1986)

who

showed that the steady
flow
s

of remittan
ces have

eased the foreign exchange constraints, improved the balance
of payments and has augmented national sav
ings.


Remittances,
Consumption

and Welfare


There is a general tendency among the early authors to conclude that remittances go into
consumption. However this may not be necessarily bad.
Using computable general
equilibrium (CGE) modelling framework, Sta
hl and Habib (1989) showed that even if
only small proportions of remittances income go to direct inv
estment while the majority

13

go

to serve the purpose of consumption needs, remittances could still be developmental.
They set up CGE model and quantitatively

explored whether expansion in consumption
increase aggregate demand. The study found evidence that in Banglades
h
remittances
tend to be spent within those sectors which have relatively strong linkage with the rest of
the economy. Thus many sectors not dir
ectly benefiting from the remittance expenditure
would nonetheless experience an increase in demand for their output inducing investment
in their sectors and expanding employment. In a theoretical paper not exactly related to
Bangladesh but
in
general

appl
icable
to labour exporting Asian labour
-
surplus
economies, Qubria (1997)
simultaneously

combined

migration and remittance
in a model
to derive and prove

a series of propositions. The main theoretical conclusions were

that

if
remittances per capita exceed t
he source
-
country wage rate then aggregate GNP of the
labour
-
exporting

country will increase and also

that

if migration is
accompanied by
sufficient remittances then it will enhance welfare in the source country irrespective of
the criteria that is used to

measure welfare.


Remittances Utilisation, Micro Finance Institutions (MFI) and
Socio
-
Economic Context


The later studies of remittances flows in Bangladesh

were mainly qualitative except some
very recent ones. The objectives of these studies had been to identify the nature and
dynamics of remittances, recipient households and the remitter in a broader social
context. Murshid et al (2002) is one such study. I
t contained a micro
-
level survey data
methodology to identify the socio economic profiles of migrant family and discussed
channels both official and unofficial through which remittances come and various types
of remittances. It also discussed the prospects

and challenges of channelling remittances
via the official way through the national and multinational banks. Murshid et al (
2002)
also provided a

Keynsian type analysis of macroeconomic effects of remittances on the
economy. Using a short
-
run Keynsian st
ructural equation type model this study estimated
a remittances multiplier in the economy which equalled

3.33 indicating a one million t
aka

(Bangladeshi local currency)

increase in remittances would increase national income by
3.33 million taka. Note that
this is just a level effect not a growth effect. This type
structural equation type estimation is not without problems because of the assumption of

14

fixed price and interest, as the model
ignores

the monetary
and the real
sector.
Nonetheless this is so far
the only study in Bangladesh which tried to econometrically
estimate some macroeconomic effects of remittances. A major study by Siddiqui and
Abrar (2003)
used survey data and
tried to qualitatively investigate nature and dynamics
of people linked through
remittances and the linkage between workers’ remittances and
micro
-
finance institutions in channelling and transferring remittances
in
Bangladesh. By
surveying one hundred households, this study provided detailed characteristics of
remittance receiving hou
seholds, their socio economic profiles and the different ways
remittances are used by them. For example, the study found that more than half the
remitters, three quarter of whom are less than thirty five years of age, were married
although the highest numb
er
of
remittance
s

recipient members were the parents who are
typically more than fifty years of age, half of who
m

are illiterate. The study reported that
some portion of remittances were invested in land and did not go towards savings while a
substantial p
art of remittances were used to finance migration of other family members.
Finally the study discussed how the
extended

network

of the multi finance institutions
(MFI)

can be used to channel inward remittances and direct them to productive usage. In
a simi
lar paper, Azad (2004) discussed various prospects of channelling the huge volume
of remittances received in the official way towards the development of micro
-
enterprise
s

by financing their capital needs. He outlines various diaspora based investment
instr
uments to attract migrants’ remittance
s

through official channel and the
complementary role that various micro finance institutions can play to expand financial
access in rural and remote areas and
also finance

micro
-
enterprise activities. In almost the
sa
me spirit, Siddidui (2004) identifies the different types of agents and institutions
involved in remittances transfer process which include different ministries, training
institutes, civil society, commercial banks, Bangladesh Bank

(the central bank of
Ban
gladesh)
, micro
-
finance institutions, investment instruments, specialized bank
accounts,
different
laws related to
govern
remittances
flows
and money laundering
etc.
The study later gives recommendations on how to coordinate all these factors to make
remit
tance
s

transfers efficient.
One

major finding of this study is that the general
perception that remittances are put to unproductive use has no empirical validity
anymore. The study further notes that such observation may have been valid in late 1970

15

or ear
ly 1980s. However in 1990s the migrants families have tried to effectively utilise
the remittances they received by investing in nutritious food for the family members,
health, education, land purchase and financing migration of other family members. De
Br
uyn and Kuddus (2005
) studied the various impacts that

remittances
have
on
households and
on
the broader community level in Bangladesh and discussed the various
means through which government or NGOs can enhance the impact of remittances.
In the
end

they d
iscussed major hindrance and opportunities to efficiently utilize remittances for
productive purpose which have an impact on the society as a whole.


Macroeconomic Determinants of Remittances


One recent study

on remittances in Bangladesh
has

been involved with the current issues
in remittances literature



determinants of workers’ remittances
. A macroeconomic paper
by Barua, Majumder, Akhteruzzaman (2007) used a balanced panel dataset of bilateral
remittances flows from ten major destination
countries for Bangladeshi migrants’ over
the period 1993 to 2005 and identified the major determinants of the inflow of workers’
remittances in Bangladesh. Income differe
ntial was found as one significant

determinant

of
remittances. High inflation in home
country vis
-
a
-
vis the host countries exerts negative
influence on
inward
remittance
s

whereas depreciation (or devaluation)

of currency

leads
to increased flow of remittances.


Remittances and Poverty


Khan (2008) used Household Income and Expenditure Sur
vey 2005 data conducted by
Bangladesh Bureau of Statistics to
carry out

a micro
-
level study on the impact of
remittances on household incomes
to

infer about the status of poverty

in Bangladesh
.
The
paper

used an advanced statistical technique called
Propensity Score Matching

(PSM).
This
statistical
technique match
es

remittance
s
-
receiving households with other
households with similar characteristics but
who do
not receive remittance
s
. PSM uses
statistical
criterions to performing such matching and comp
ute the effect of remittances
on the probability of being poor. The paper shows remittances account for positive and

16

significant differences in household income per capita between the remittances recipient
and non
-
recent household
s
. The author compute
s

tha
t remittances receipts lead to an
approximately eighteen percent decline in pov
erty. T
he most recent paper on remittances
in
Bangladesh

is by Buchenau (2008) which qualitatively outlines the various aspects of
migrational and remittances in Bangladesh. It

also provides a framework for analysing
the link between migration, remittances and poverty at the household level as well as
macro level.



17

4.
Review
of
Literature on Remittances and
Economic

growth



Remittances can help relax the budget constraint in t
he recipient economies and increase
consumption of both durables and nondurables (IMF 2005). Moreover remittances can
lead to higher accumulation of human capital through allowing for education and health
care, and also can lead to increased physical and f
inancial investment (IMF 2005). So,
theoretically, remittances have the potential to spur growth. IMF (2005) notes that the
inflow of remittances on the macroeconomy can lead to accelerated long
-
run growth as a
result of additional investments in physical
and human capital. The study further notes
that the likelihood of such outcome is strengthened in economies with well
-
developed
financial markets and institutions which allow for effective intermediation of remittances
in the financial system.


According
to Chami et al. (2008) arrival of remittances can increase growth by increasing
investment in physical capital, human capital and by developing the financial system in
the recipient country. If there are significant financial constraints in the country tha
t keep
out a large group of household from the credit market, remittances may help ease that
constraint and lead to increase in domestic investment rate. Significant portion of
remittances are spent on acquiring education and nutrition leading to higher ra
te of
human capital accumulation. This leads to total factor productivity and subsequent
growth. In addition to increase in higher accumulation physical and human capital,
remittances can have a positive impact on growth by affecting the recipient countrie
s’
financial system. Remittances can lead to increase in the demand for money and expand
the supply of funds into the recipient countries’ banking system. This contributes to the
financial development of the remittance recipient economies and subsequently
causes
higher economic growth.

According to (World Bank 2005) remittances
should have a
positive im
pact on growth because
it finance household investment in education and
health, and entrepreneur
ship to help capital formation.


However, the effect of remit
tances on long term economic growth could also be negative.
For instance

inward remittances are by product
s

of outflow
s

of work force

often skilled

18

or semi skilled

that should be negatively affecting growth

(World Bank 2005)
. Chami,
Fullenkamp, and Jahjah
(2003) argue that a substantial amount of remittances are
motivated by altruism and arrive in the economy to compensate for any
income

losses
incurred by the migrants’ family members due to bad economic condition

at home
. This
creates

a moral hazard proble
m as the
migrant

would not know whether income loss is
due to genuine bad economic condition or not. As a result this may encourage the
recipient household
s

who participate in local labour market to choose more leisure over
work and cause an aggregate reduction
in

labour supply which
may
negatively affect
economic
growth. Another way remittances can
negatively
affect growth is
by
diminishing
technological ca
pacity

of the economy
through
appreciating
the

real
exchange rate

(Chami et al 2008)
. Usually an economy’s technical capacity
will

largely
depend on the size of

its

tradable goods sector
. Production in some component of the
traded goods sector such as non
-
traditional manufactures intended for export can spur
technological diffusion and increase the technological capacity for other firms in the
economy. Arrival of remittances inflow can appreciate the economy’s real effective
exchange rate and render the tra
dable sector uncompetitive. This “Dutch disease” effect
will shrink tradable goods sector and allow resources to shift to the non
-
tradable goods
sector and thus diminish the growth of technological capacity of the whole economy and
subsequently reducing ec
onomic growth.


Relatively recently there has emerged a substantial empirical literature to measure the
impact of remittances on GDP growth. These papers are discussed below.


Chami
, Fullenkamp, and Jahjah (2003)


Chami, Fullenkamp, and Jahjah (2003) (henc
eforth CFJ) use aggregate remittance data
for a sample of 83 countries over the 1970
-

1998 period to examine the relationship
between workers remittances and per capita GDP growth. The study used panel
regressions of growth of real GDP per capita on worke
rs’ remittances to GDP conditional
on initial per capita income, investment to GDP ratio, inflation rate, regional dummy and
the ratio of net capital flows to GDP. Later the study replaced workers’ remittances to

19

GDP variable with a
change

in that ratio as

a regressor to incorporate the dynamic nature
of private transfers. Overall, Chami et al (2003) found that, the investment to GDP and
net private capital flows to GDP ratio were positively affecting growth but workers’
remittances to GDP ratio either was
not significant or negatively related to growth. In
order to test whether the relationship could be non
-
linear, CFJ used a squared term of the
remittances to GDP ratio and still found the same result. However, when
change

in the
ratio was added to replace
the variable in levels, it was found that annual
change

in
remittances to GDP ratio negatively and significantly affects growth. To account for
possible endogeneity problem such that the main causes of remittances are also affected
by it, CFJ used some ins
truments for remittances and also conducted a two stage
instrumental variable technique to estimate the relationship. In the first stage each
workers’ remittances to GDP ratio was estimated as a function of each country’s income
gap and real interest gap r
elative to the United States. Having estimated this equation, the
fitted values of remittances to GDP are obtained. In the second
-
stage per capita GDP
growth regression is estimated using fitted values of remittances to GDP ratio from stage
one as regresso
r conditional on the same variables as before. Here too the
changes

in
remittances to GDP ratio are found to be negatively related to growth.


IMF (2005)


The IMF (2005) undertook a similar cross
-
country growth regression like Chami et al
(2003) by taking
a sample of 101 countries with data ranging over 1970


2003 periods.
However, unlike Chami et al (2003), IMF (2005) took an aggregate measure of
remittances which include the sum total of three components


workers’ remittances,
compensation of employees

and migrant transfers


of the balance of payments whereas
Chami et al (2003) only took the workers’ remittances component. The IMF study
performed cross
-
sectional growth regression of real GDP growth per capita on ratio
remittances to GDP. The additional

control variables included log of initial income,
education, log of life expectancy, investments, inflation rate, budget balance, trade
openness and financial development. The study also used two instruments for
remittances. These include distance between

the migrants’ home and main destination

20

country, and a dummy measuring whether the home and the main destination country
shared a common language. Since these instruments are time invariant, a panel estimation
was not undertaken rather a cross
-
sectional e
stimation over the averages of 1970


2003
was done. Using this cross
-
country growth regression framework, no significant link was
found between real par capita GDP growth and remittances.


Faini (2006)


Faini (2006) estimated cross
-
sectional growth regressions on a sample of 68 countries
where the dependent variable is per capita GDP growth. Using aggregate measure of
remittances data in IMF (2005) the study did not include investment in the list of
regr
essors. Faini (2006) notes that the positive impact of remittances on growth usually
work through investments. So including it in the regression may render the effects of
remittances insignificant as the investment’s coefficient could be capturing some of
the
effects. Along with remittances to GDP ratio, the control variables used were initial per
capita GDP, secondary school enrolment (as a measure of human capital), the number of
telephone lines per 1000 inhabitants (as an indicator of physical capital) a
nd the
International Country Risk Guide index as an indicator of institutional quality. The
estimated coefficient on the remittances to GDP ratio was found to be positive and
significant in the OLS regressions of the study. Later foreign aid to GDP ratio w
as
included as additional control variable and remittance was still found to be positively
affecting growth. In order to encounter the endogeneity problem, the study also used an
instrumental variable estimation procedure. Remittances to GDP ratio were ins
trumented
by distance from the home country to the main destination country. The result was still in
support of a positive impact of remittances on per capita GDP growth but the estimated
coefficient in remittances to GDP became insignificant. Finally, in
order to see how the
impact of remittances interacts in deferential policy environment, the study added two
additional regressors: black market exchange premium and inflation. These variables
measure the overall stability of the macroeconomic system. Highe
r values of these
variables would imply weak macro policy environment. In such a environment the
incentive to use remittance income for investment purpose will be relatively weak. To

21

test this hypothesis, the study included two interacting terms as regress
ors. Such as
remittances to GDP interacted with black market exchange premium and with inflation
rate. The estimated coefficient on the interacting terms was found to be negative and
significant meaning that the positive impact of remittances on growth get
s diluted when
the macroeconomic policy environment is unstable and unsound.


Catrinescu, Leon
-
Ledesma, Piracha and Quillin (2006)


The study by
Catrinescu, Leon
-
Ledesma, Piracha and Quillin (2006)

(henceforth CLPQ)
incorporated institutional variables in
their study covering 114 countries in their sample
over the 1991


2003 period. The authors doubted that the results obtained in Chami et al
(2003) are not tenable for two reasons


misspecified econometrics method and failure to
use the correct sets of co
ntrolled variables. According to CLPQ Chami et al (2003) did
not address the problems associated with panels estimations when the errors are
autocorrelated. And also the endogeneity problem was not properly tackled. Though CFJ
used an instrumental variable

regression estimation with income and interest rate gap as
instruments, these were not enough in eliminating the endogeneity bias. To overcome
these methodological problems, CLPQ suggested a superior but more rigorous Dynamic
Panel Data (DPD) estimator me
thod. The second is the control variables issue. According
to CLPQ, Chami et al (2003) obtained a negative correlation between GDP growth per
capita and remittances because a correct sets of control variables were not included in
their specification. The
authors in the CLPQ paper further argued that the fundamental
way to increasing the growth impact of remittance is to promote the right
institutions

in
the economy that support a sound business environment and a secured financial sector
that encourage hous
eholds to invest in both physical and human capital of any income
that exceeds their basic subsistence. Hence they suggest a conditioning role of
institutions
. CLPQ consider role of remittance receiving countries’
institutions

in
conditioning the dynamics
of the growth


remittances relationship. That is whether
remittances matter for long term economic growth depends on whether the receiving
countries have the correct economic, political and governance institutions. CLPQ
conducted OLS cross
-
sectional and v
arious static and dynamic panel data estimator

22

regressions of per capita GDP growth on the log of total remittances to GDP. The control
variables include initial GDP per capita, ratios of gross capital formation (investment)
and net private capital flows t
o GDP and the following institutional variables: a) United
Nations Human Development Index (UNHDI), b) corruption perception index (CPI), c)
six governance indicators and d) International Country Risk Guide (ICRG) political risk
indicators. Overall the CLP
Q study found robust and positive relationship between
growth and investment as well as between growth and some of the institutional variables.
The study also found evidence of a positive relationship between growth and remittances
though the magnitude of
this relationship was a little weak.


Guiliano and Ruiz
-
Arranz (2006)


The study by Guiliano and Ruiz
-
Arranz (2006) (henceforth GRA) took a sample of 73
countries during the 1975


2002 period. Aggregate measure of remittances was chosen
as sum of all thre
e categories on the balance of payments as in IMF (2005). In the paper
of GRA remittance was found to strongly and robustly affecting growth
through

its
interacting effect with the financial sector of the economy. According to authors the
relationship betw
een remittances, financial development and growth is a
-
priori ambiguus
but it is clear that the
impact

of remittances on growth can depend on the
level

of
financial development. In this case authors suggest two scenarios. Either remittances and
financial d
evelopment are
substitutes
. That is inward remittances work as a substitute for
low level of financial development and supply the much required funds for investments
which otherwise would have remained unrealized due to credit constraint. The second
scenar
io is, remittances and financial development are
complements
. Which means
remittances enhance economic growth in an economy with a well developed financial
markets. The study conducted OLS as well as fixed
-
effects panel estimates and used
system generalized methods of moments (SGMM) estimator that uses internal
ins
truments to account for endogeneity. At first the study regressed per capita GDP
growth on total remittances to GDP ratio. The control variables include initial level of
GDP per capita, the investment to GDP ratio, population growth, the government fiscal
balance as a ratio of GDP, years of education, measure of openness to trade, and

23

inflation. The estimated coefficient on remittances to GDP ratio was found to be
insignificantly related to growth in this specification. Later to test the hypothesis whether
remittances might enhance growth by relaxing credit constraints, the study included
financial development and its interaction term with remittances variables as additional
controls in the regression. The measures for financial development used were M2 over

GDP ratio, total deposit over GDP ratio, loan to private sector over GDP ratio and credit
to public and private sector GDP ratio. Significantly negative interactions terms between
remittances and measures of financial development were found and the estima
ted
coefficients on the remittances to GDP ratio variable turned positive, significant and
robust among alternative specifications. This lead to the conclusion remittances appeared
to have positive impact on growth in those countries which are faced with c
redit
constraints with small financial sectors. Thus remittances work as a substitute for low
level of financial development and help promote growth.


World Bank (2006)


The World Bank (2006) study conducts a panel data estimates on the impact of
remittanc
es and growth using a sample of 67 countries measured over the period of 1991


2005. The control variables used were (all in logs) initial GDP per capita, secondary
school enrolment ratio, the private domestic credit to GDP ratio, ICRG political risk
inde
x, real export and import to GDP ratio, inflation rate, real exchange rate
overvaluation, government consumption, and time period dummies. A SGMM estimation
procedure was performed with the use of external as well as time varying instruments to
control for

the endogeneity of remittances. These instruments were formed by
multiplying the share of a country’s migrants to its top five OECD destinations and a
measure of the respective OECD country’s economic performance, such as GDP per
capita, GDP growth rate o
r unemployment rate. The other instruments were average
output per capita of the top country destinations across the world weighted by the inverse
of the distance between remittance sender and recipient country. Instrumented this way,
the regression specif
ications found a positive and significant relationship between
remittances to GDP ratio and per capita GDP growth. The magnitude of the estimated

24

effect of remittances on growth was found to relatively small in economic terms. Increase
in remittance to GDP

ratio from 0.7 percent to 2.3 percent is estimated to have led to an
increase in 0.27 percent increase in GDP growth. However, when the investment to GDP
ratio is included along with the rest of control variables, the estimated coefficient on
remittances
to GDP looses significance. This led the study to conclude that one of the
main channels through which remittances work is through increasing domestic
investment.


World Bank (2008)


According to this World Bank (2008) study what impact remittances have o
n growth will
depend on the policies being implemented by the home country. This study found out a
number of areas that are complements to remittances in the matter of enhancing
economic growth. This study included interaction terms with for remittances an
d
education, remittances and financial depth, remittances and institutional qualities, and
remittances and macroeconomic policy distortions. This study used a GMM instrumental
variable procedure to estimate four growth regressions for each of the complemen
tary
sector outlined above. The instruments used were the time varying one in World Bank
(2006). All regressions used the same control variables as in World Bank (2006) but each
included a remittances and the respective complementary terms as additional co
ntrol. The
argument is remittances augments growth in the presentence of complementary policies
that encourage education, increase financial depths, improve institutional qualities and
reduce macroeconomic policy distortions. The study found a negative and

significant
coefficient on the total remittances to GDP ratio, but positive and significant coefficients
on each of the interaction terms. This, the argued, implied a net positive impact of total
remittances on GDP.





25

5.
Does Remittances Affect Economic

Growth in Bangladesh
?

Econometric

Results


In this section we are going to provide an econometric analysis of the growth impact of
remittances in Bangladesh
. Firstly we will discuss the basic model. The basic model has
three alternate specifications. Each of these specifications will be estimated using an
OLS, Instrumental Variable

Two Stage Least Square (IV
-
2SLS), and
IV
-
GMM
estimators. In the end we will di
scuss some limitations of our results.


Econometric Mode
l


Our basic model for the analysing whether remittances affect growth in Bangladesh is:









[1]


where
y

is the per capita GDP growth, our variable of interest is
R
em

which

is log of
remittances
3

to GDP ratio and
Z

is a vector of control variables. The control variables
were those which were frequently included in the “growth


remittances” regressions in
the literature. Here they are (all in logs) gross capital formation to

GDP ratio (
lgcf
),
populations growth (
lpop
), government consumption to GDP ratio (
lgov
), M2 to GDP
ratio (
lm2
), inflation rate (
linf
). The last three controls are included as a proxy to the
capture effects of government size, financial development and relative macroeconomic
stability.


Next we recognise the fact that the “growth


remittances” relation in Bangladesh may be
non
-
linear.

As a result we provide an alternative specification of [1] by including the
squared term of our variable of interest
R
em
:







[2]





3

Actually Rem include “workers’ remittances and compensation employees” from the IMF balance of
payments statistics


26

all the variables here are same as [1], only exception is
which is squared ter
m of
the variable
R
em

(
lrem2
).


Finally, to capture the interactive effect, if there is any, between remittances and some
other control variable included in Z, we will modify the specification [2] further. As it is
found in the literature, remittances cou
ld be affecting economic growth via its interacting
effect with the level of financial development. To capture this interaction between
remittances and financial development we will include an interacting term in [2] and
provide our third and final specifi
cation:





[3]


where the interaction variable

is the log of remittances to GDP times log of
M2 to GDP ratio (
lm2rem
).


Econometric Results





We present the econometri
c results of our models outlined

in equations [1]
through

[3].
We report an OLS estimation followed by an IV
-
2SLS and
a
GMM
-
IV

estimators
. The
results are presented at Table
2
. The data for th
is estimation were taken from World Bank
World Development Indicators 2008 for the period over 1974


2006. Because
remittances data are recorded from 1976, we loose 2 observations. So in the whole
exercise the sample size equals 29. An ideal methodology w
ould have been to test for
unit roots of each of the series and check for the order of integration and then do

a

test for
a co integrating relationship among the variables. Since it is just the beginning of my
thesis and the sample size is only 29, I plan
to do all these tests later on. Here our
objective is to simply see if remittances positively or negatively affect growth of GDP per
capita in Bangladesh over the period 1974


2006.

27

Table
2
. Remittances and Economic Growth in Bangladesh (Model Estimation
)
4

Dependent Variable: Per capita GDP growth


Explanatory

Variables
(All in logs)

OLS

IV
-
2SLS

GMM
-
IV

Eq. [1]

Eq. [2]

Eq. [3]

Eq. [1]

Eq. [2]

Eq. [3]

Eq. [1]

Eq. [2]

Eq. [3]

Gross capital formation to GDP
(
lgcf
)

-

4. 291
(
-
1.01)


0.527
(0.14)

7.038
(1.26)

12.134
(1.03)

-
0.429
(
-
0.12)

5.992
(1.13)

12.134
(1.18)

-
0.429
(
-
0.16)

5.992
(1.19)

Population growth (
lpop
)

-

17.57
(
-
2.35)


-

8.36
(
-
1.21)

2.523
(0.26)

6.241
(0.35)

-
9.931
(
-
1.53)

0.763
(0.08)

6.241
(0.45)

-
9.931
(
-
.2.09)*

0.763
(0.10)

Government consumption to GDP
(
lgov
)

-
3.731
(
-
1.43)

-

6.161
(
-

2.64)*

-
0.897
(
-
0.22)

1.973
(0.40)

-
6.171
(3.10)**

-
1.947
(
-
0.46)

1.973
(0.48)

-
6.171
(
-
3.07)
**

-
1.947
(
-
0.51)

M2 to GDP (
lm2
)

0.501

(0.24)

0.256
(0.15)

11.718
(
-
1.57)

7.421
(1.45)

0.033
(0.02)

9.487
(1.16)

7.421
(1.65)

0.033
(0.02)

9.487
(1.35)

Inflation rate (
linf
)

-
0.042
(
-
0.14)

-
0.397
(0.181)

-
0.121
(
-
0.37)

0.363
(0.78)

-
0.383
(
-
1.56)

-
0.181
(
-
0.59)

0.363
(1.03)

-
0.383
(
-
2.40)*

-
0.181
(
-
0.85)

Remittances to GDP (
lrem
)

-
0.498
(
-

0.29)

-
6.235
(
-
2.69)*

6.372
(0.77)

-
8.666
(1.53)

-
5.495
(
-
2.34)*

3.655
(0.38)

-
8.666
(1.72)*

-
5.495
(
-
3.23)
**

3.655
(0.46)

Remittances to GDP squared
(
lrem2
)


2.515
(3.16)**

7.759
(2.27)*


2.316
(3.05)**

6.764
(1.82)*


2.316
(4.22)**

6.764
(2.05)*

(Remittances * M2) to GDP
(
lm2rem
)



-
8.166
(
-
1.58)



-
6.535
(
-
1.12)



-
6.535
(
-
1.29)


n = 29
r
2
=0.58

n = 29
r
2
=0.72

n = 29
r
2
=0.75

n = 29
r
2
=0.16
W
ald
chi
2
=22.66

n = 29
r
2
=0
.72
W
ald
chi
2
=70
.
14

n = 29
r
2
=0
.75

W
ald
chi
2
=
86.74

n = 29
r
2
=0
.16
W
ald
chi
2
=
14.00

n = 29
r
2
=0
.71

W
ald
chi
2
=
204.5

n = 29
r
2
=0
.75

W
ald
chi
2
=
205.5




4

The Stata output of all these estimations are available on request.


28

If we look at Table 2
, we can see that, when simple OLS estimation is carried out on
Equation [1], remittances seem to negatively affect growth but the estimated coefficient
is statistically insignificant. This prompt us to assume that th
e “growth


remittance”
relationship might be non
-
linear. Adding a squared term of remittances we estimate
Equation [2]. This time the estimated coefficient on the remittances variable is negative
and significant, and the estimated coefficient on the squar
ed remittances term is positive
and highly significant. In this specification the R
2

increases from the previous one
implying a better fit. Lastly we assume that remittances could be affecting growth
through its interacting effect on financial development.

This is why we include a
interaction term between remittances and M2 to GDP ratio, and provide our estimation
result of Equation [3]. We see that this remittance and growth relationship has a positive
sign though insignificant. The coefficient on the squa
red remittances term is positive and
highly significant. The R
2

also increases slightly.


In a similar way, we estimate equations [1] to [3] using an alternative estimator IV
-
2SLS.
Her we take account for the fact that remittances could be endogenous, hen
ce we use an
instruments for this variable. Since the major portion
s

of remittances that are sent by the
Bangladeshi migrants usually come from Middle Eastern Asian Countries,

we chose the
GDP per capita
of Saudi Arabia

as an instrument

for remittances. Th
e result is almost
similar to the OLS estimates. Without the squared remittances and interactive term,
remittances’ impact on growth is negative but not significant. When squared remittances
variable is added both coefficients of remittances and squared re
mittances are significant
while the former has a negative sign and the latter
has
a positive. After the interaction
term is added onto the regression, remittances seem to positively affect growth though the
estimate is statistically not significant.


Final
ly we provide estimations of equation [1] to [3] using GMM
-
IV estimator. The
instrument used for remittances is same as before


per capita GDP of Saudi Arabia. The
estimated coefficients are identical to those of IV
-
2SLS however there seem to have been
im
provements in terms of reductions in standard errors of the estimates. The t
-
ratios
improved for some estimates. Hence some estimates which were insignificant previously

29

are now significant. Remittances negatively affect growth when neither squared
remitta
nces term nor the interaction terms are added. When the squared remittances term
is added, remittance still negatively and significantly affects growth

but the

estimated
coefficient on the squared remittances term is positive and significant as usual. When

the
interaction term is added, remittances positively affect growth but the estimated

coefficient is not significant
.


The main findings
are


a
) There
is strong evidence that there is

a non
-
linear relationship between
flows of inward
remittances and econo
mic growth in Bangladesh. The estimated coefficient on the
squared remittances variable is
positive and
significant in all six specifications where it is
included.
This implies

that

inflows of remittances during 1974


2006
in Bangladesh
reduce

per capita GDP growth rates i
n the initial phase but enhance

growth
rates at a later
phase. This could be
due to the fact that in the early period
s

remittances were put to
unproductive use (Mahmud and Osmani 1980) whereas in the later period
s

remittances
were utili
s
ed for more productive purpose (Siddidui 2004).

In the early period
s of 1974


2006,

remittances recipients
in Bangladesh
could not have utilised the flows properly as
there were less opportunities to put them into productive use. This could be
due to the
relative shortages of financial instruments

or investment opportunities

in the initial phase
of development. In

the later phase
the proliferations of

NGOs, Micro
-
Finance
Institutions

(MFI)
and other private Banks may have
caused the
increased ef
ficiency of
remittances utilisation

through offering increased

varieties

of

income generating

financial
products and
services.
For
instance

in 1997 BRAC



the largest NGO in Bangladesh


initiated
the
Micro Enterprise Lending and Assistance (MELA) programm
e which
provides loans to individuals for both working capital and capital investment. Migrant
workers or their families
who live with
in

the fifteen miles radius of the project
could
apply for
MELA’s assistance

if they have

viable
investment
projects. Gram
een Bank also
has several products that remittances receiver or sender may choose.
Such as in
one
scheme the amount saved doubles in seven years. In another

scheme for every deposit of
100
,
000

taka
,

a
5000
taka
dividend is provided. In Grameen Mutual Fund
investment

30

plan, a person depositing
1000
taka
per month will get more than double that amount
invested after ten years. The proliferation
s

such

financial products by MFIs in the later
part
of the period 1974


2006,
may
have
led to the shift in

Bangladesh
i

households'
preferences
from consuming out of remittances income
s

to investing in health, education
and financing micro enterprise
s
.
The consumption to investment shift
could also
stem
from

overall macroeconomic situation. In the early part of the 1974
-

2006 period
s
,
especially from early 70s to late 80s,

the economy was plagued with distortions with
a
relatively closed economy coupled with

high tariffs

and a
repressed financial sector.
Thr
ough the initiation structural adjustment program
me
s and reforms in the real and
financial sectors
of the economy in the

early 1990s these constraints have gradually
rel
axed.

The consequences of such changes in the economic policies mean
that
the
overall m
acroeconomic situation was conducive to investment and private sector growth
in the latter part of the time frame
whereas in the earlier

part it was not so
.
Hence it can
be argued that the
lack of

activities of MFIs and NGOs accompanied by a
n

un
favourable
investment climate during the
earlier

phase
led the

households to
put their remittances
into unproductive use or into conspicuous consumption. But at the later stage this trend
was reversed because of increased MFI and NGO activities along with a favourabl
e
macroeconomic environment conducive to investment motivated households towards
productive use of their remittances

receipts
.


There could also be a productivity based explanation for the non
-
linear effect. Inflow of
remittances might have
led to the rea
l effectiv
e exchange rate appreciation i.e.
the Dutch
disease effect by

squeezing the tradable goods sector and reducing technological capacity
in the overall economy

and
thus reducing growth

i
n the early p
hase
. In the later phase the
situation should have

been exacerbated due to diminishing returns combined with Dutch
disease effect. However, due to favourable investment climate, r
elative openness of the
economy and

proliferations of MFIs and NGOs in channelling remittances into
productive investments, the

Dutch disease and diminishing return effects were
perhaps
outweighed thru
overall
productivity gains in

the economy at

the later phase

which
contribu
ted to growth.
Thus remittances
may
have a non
-
linear effect on per capita GDP
growth in Bangladesh with g
rowth falling first and then rising later on.


31

b
) Out of the nine estimates, remittances


effect
s

on growth had been negative six times.
Of these six estimates, four had been statistically significant. A firm conclusion that
remittances negatively affect gr
owth cannot be reached from here because three of these
four times, the negative effect remittances had been neutralised by positive effect of the
squared remittances variable added in the regression. That is in these four significant
estimates, three time
s the squared remittances variable was included in the speciation
whose estimated coefficient was positive and significant. So considering equation [2], the
total effect of remittances on growth when both remittances and squared remittances
variables are i
ncluded, is
. A negative and significant estimate
of
can be neutralised or even outweighed by a significant positive estimate of
.
Another
reason why a firm conclusion cannot be reached if remittances negatively effect
growth, is when we include the interaction term, the sign of estimated coefficient on the
remittances variable become positive.


c
) Most likely the positive effect of remittances on the growth rate of the economy is
channelled through its interaction with the financial sector. Because only when the
remittances and financial development interaction term is added the estimated sign on
coefficient on remittances variable is positive in all three alternative specifications.
However these estimates are not significant.


Conclusion and Further

Research


This paper consists of a part of my Ph.D. thesis which is macroeconomic impact of
remit
tances on the Bangladesh economy. The “growth


remittances”
relationship

is a
part of the
macroeconomic
impact of remittances. However the results of this paper have
some severe limitations.
Firstly, this study is severely constrained by limitation of dat
a.
Only 29 observations based on annual data were available to perform the econometric
study. In order for the econometric exercise to be meaningful at least more than 30
observations are required. In later part on my
Ph.D.
thesis I may have to include oth
er
similar economies of South Asia
and perform a panel study using country specific

32

dummies

to
make

analysis more informative and
meaning
ful
. Secondly, d
ue to
unavailability of human capital formation
data
(gross enrolment ratio)
for the time perio
d
1974


2006
, this important conditioning variable was not included in our regression.
Thus we have not adequately controlled for the other factors which are important in
the
growth
regressions. These

also include macroeconomic volatility, exchange

rate

misalignment, and institutional quality. In

later part on my thesis I will
estimate the
macroeconomic volatility and exchange rate misalignment

in Bangladesh
. There is
evidence in the literature that remittances reduce macroeconomic volatility and induce
real exchange rate appreciation. Once these channels are included in the growth analysis
along with the financial development measure, the
true nature and effects of remittances
on growth can be unveiled. Based on whatever information, data and model we ha
ve
now, we can conclude that the effect of remittances on per capita GDP growth of
Bangladesh is at best inconclusive.
Nonetheless t
here is strong evidence that this “growth


remittances” effect is non
-
linear. At early stages of the economy, remittances r
educe
growth rates but increase growth rates at a later stage. This could be due to unproductive
use of remittances in the beginning followed by productive utilization later on. Any
negative impact that
remittances may
have

on growth
might

be potentially m
itigated by
this non
-
linearity. On the other hand, it may be possible that remittances positive
ly affect
per capita GDP

growth in Bangladesh when the complementarity between remittances
and finan
cial development is incorporated

into the analysis.

But firm
conclusions can
only be made when other important control variables are added onto the analysis and also
when the current data set can be expanded either with quarterly frequency or by including
panel of other similar South Asian economies.


33

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